Cummins Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

MARKETABLE SECURITIES

MARKETABLE SECURITIES

12 Months Ended

Dec. 31, 2014

Marketable Securities [Abstract]

MARKETABLE SECURITIES

NOTE 5. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows:



	December 31,
	2014						2013
In millions	Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value
Available-for-sale
Level 1^{(1) (2)}
Equity securities⁽³⁾	$	—	$	—	$	—	$	10	$	13		$	23
Total Level 1	—		—		—		10		13			23
Level 2^{(2) (4)}
Debt mutual funds	75		1		76		99		2			101
Equity mutual funds	9		—		9		—		—			—
Bank debentures	6		—		6		2		—			2
Certificates of deposit	—		—		—		22		—			22
Government debt securities	2		—		2		3		(1		)	2
Total Level 2	92		1		93		126		1			127
Total marketable securities	$	92	$	1	$	93	$	136	$	14		$	150

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⁽¹⁾ The fair value of Level 1 securities is estimated primarily by referencing quoted prices in active markets for identical assets.

⁽²⁾We revised 2013 balances to classify $72 million as Level 2 assets instead of Level 1.

⁽³⁾In the first quarter of 2013, we realized a $9 million gain on the sale of equity securities.

⁽⁴⁾The fair value of Level 2 securities is estimated primarily using actively quoted prices for similar instruments from brokers and observable inputs, including market transactions and third-party pricing services. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during 2014 and 2013.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The fair value hierarchy prioritizes the inputs used to measure fair value giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). At December 31, 2014, we did not have any Level 1 or Level 3 financial assets or liabilities.

A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:


•	Debt mutual funds— Assets in Level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at Level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.

•

Bank debentures and Certificates of deposit— These investments provide us with a fixed rate of return and generally range in maturity from six months to five years. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.


•	Government debt securities-non-U.S. and Corporate debt securities— The fair value measure for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities and gross realized gains from the sale of AFS securities were as follows:



	Years ended December 31,
In millions	2014		2013		2012
Proceeds from sales and maturities of marketable securities	$	336	$	525	$	585
Gross realized gains from the sale of available-for-sale securities⁽¹⁾	14		14		3

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⁽¹⁾ Gross realized losses from the sale of available-for-sale securities were immaterial.

At December 31, 2014, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:



Maturity date	(in millions)
1 year or less	$	77
1 - 5 years	6
5 - 10 years	1
Total	$	84

- Definition

Tabular disclosure of marketable securities. This may consist of investments in certain debt and equity securities, short-term investments and other assets.

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